INTRODUCTION TO

INCOME TAX
By: Fayaz Hussain Abro,
Deputy Commissioner, Inland
Revenue
WHAT IS LAW?
―Law is a code of conduct for the people in a
given community, which controls their
activities towards each other, with respect to
their private and business lives, and to their
relationship with the State.”
WHAT IS TAX?
“ Tax is a compulsory levy by an organ of
government for public purposes.”

“ Tax is what we pay for a civilized society.”

WHAT IS INCOME?
1. Ordinary Meaning: Any amount that is
ordinarily considered income.
2. Ordinance Specific Meaning: Any amount
chargeable to tax under the ITO 2001.
ORIGIN OF TAX ON INCOME
 Tax was imposed on ‗Income‘ in 1799 for the first time
in Britain.
 Earlier, taxes were being imposed on trade, land,
property, or even tax on expenditure but not on income.
 The reason for tax on income was to generate
revenues to meet the expenses of Britain‘s war against
Napoleon. Hence, it is sometimes said that Napoleon
is the ―Father of Income Tax‖.
 Income Tax was first introduced in the Indo-Pak Sub-
continent by Sir James Wilson in 1860 to meet the
losses of the Govt.
.
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ORIGIN…
 The last Act in the British India on the subject
of taxation of income was the Income Tax Act
1922 which became the first law of Pakistan,
Bangladesh and India.
HOW IS LAW MADE IN PAKISTAN?
 A State has three pillars:
1. Legislature(Parliament/Majils-e-Shoora)
2. Executive
3. Judiciary
FUNCTIONS:
• Legislature makes law
• Executive enforces law
• Judiciary interprets law

LEGISLATURE
LEGISLATURE
Lower
House
( National
Assembly)
Upper
House
(Senate)
HOW LEGISLATURE MAKES LAW?
 According to Article 70 of the Constitution of
Pakistan,1973, a proposed law (is called a Bill)
may originate in either of the two houses of the
Parliament. Having been passed by the house
of its origin, the Bills transmitted to the other
house, from where ( if it is passed by the house)
it is sent to the President for his assent.
Thereafter the Bill takes the form of Law on the
day it is signed by the President and becomes
an Act of Parliament.
WHAT IF PARLIAMENT IS NOT IN SESSION?
Such circumstances make it necessary for
the President to take immediate action and
he makes law in the form of an Ordinance.
Ordinance has the same force as an Act of
Parliament.
in order to become a permanent law, an
Ordinance needs approval of the Parliament.
5 BASIC QUESTIONS ABOUT INCOME TAX
1. Who levies it? Parliament
2. Why is it imposed? - To generate revenue for Govt
- Re-distribution of wealth &
income in the society.
- Tool of fiscal policy to encourage
or discourage certain activities in
society.

3. What is taxed? Income (Real & Deemed)
4. Type of tax? Direct Tax
5. Who pays it?
The person on whom it is levied.
Incidence many not be passed on to an
other person.
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SOURCES OF TAX LAW
1. Income Tax Ordinance, 2001: (Primary source of law in
Pakistan)
2. Income Tax Rules, 2002: (made by FBR- Procedural in nature-
do not require Parliament‘s approval)
3. Finance Acts: (the amendments in the financial laws including
ITO 2001 are carried out in the form of a Finance Act—
essential part of ITO 2001
4. Statutory Regulatory Orders (SRO): Federal Govt empowered
to grant or withdraw exemption from income tax.
5. Circulars: explanations of provisions of ITO 2001 issued by
FBR.
6. Case Law; Legal disputes b/w tax department & the taxpayers,
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INCOME TAX LAWS IN PAKISTAN
 Historically, there have been three laws for
imposition of tax on income in Pakistan:

Income Tax Act,1922.
Income Tax Ordinance, 1979.
Income Tax Ordinance,2001.
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INCOME TAX ORDINANCE,2001
 REASONS FOR PROMULGATION:
Simplification of income tax law
Effort to make it easy to understand even for a lay
man.
Re-arrangement of income tax law
Due to numerous amendments, the I.T.
Ordinance,1979, had become complex.
Introduction of Universal Self Assessment
Scheme (USAS).
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INLAND REVENUE AUTHORITIES (S.207)

 Board(Federal Board Of Revenue)
 Chief Commissioner Inland Revenue
 Commissioner Inland Revenue
 Commissioner Inland Revenue (Appeals)
 Additional Commissioner Inland Revenue
 Deputy Commissioner Inland Revenue
 Assistant Commissioner Inland Revenue
 Officer of Inland Revenue
 Special Officer Inland Revenue; and
 Inspector Inland Revenue
FBR ORGANOGRAM

Chairman Federal Board of Revenue
Secretary Revenue Division
Member
(IR)
Member (Tax Policy)

Member (FATE)

Member (Taxpayer Audit)

Member (Enforcement & Accounts)

Member (Legal)

Member (Strategic Planning Reforms & Statistics)

Member (Administration)

Member (Human Resource Management)

09 Director Generals (Look after Special Fields)
Member
(Customs)
Chief Commissioners Chief Collectors
Deputy Chairman
(Inland Revenue)
Deputy Chairman
(Customs)
FBR INLAND REVENUE
Member Inland Revenue
18 Regional Tax Offices
1. Karachi
2. Lahore
3. Islamabad
03 Large Taxpayer Units


1. 03 Karchi 10. Multan
2. 02 Lahore 11. Bahawalpur
3. Islamabad 12. Hyderabad
4. Rawalpindi 13. Sukkur
5. Peshawar 14. Quetta
6. Abottabad
7. Faisalabad
8. Sargodha
9. Sail Kot

LTUs look after Big Taxpayers
RTOs deal with small and medium Taxpayers
Chief Commissioner is the head of each RTO / LTU
WORKING STRUCTURE
Chief Commissioner
Commissioner
Withholding Taxes
Additional Commissioner
Withholding Taxes
Additional Commissioner
Enforcement
Additional Commissioner
Audit
Additional Commissioner
Enforcement
Additional Commissioner
Audit
ACs/DCs
ACs/DCs
ACs/DCs ACs/DCs ACs/DCs
Commissioner
Zone-I
Commissioner
HRM / IP
Commissioner
Zone-II
INCOME TAX ORDINANCE,2001
There are 13 Chapters in Income Tax Ordinance,
2001.
– Chapters are divided into Parts
– Parts may be further sub-divided into Divisions
– Divisions consists of Sections
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ARRANGEMENT OF SECTIONS
Representation of Sections and their Sub-divisions:
– Sections are represented by 1,2,3…
– Sub-sections are represented by (1),(2), (3)….
– Clauses are represented by (a), (b), (c)…..
– Sub-clauses are represented by (i), (ii), (iii)….
Later Insertions:
- If a section is inserted between two sections, such as
between Section 161 and Section 162, it is written as 161A.
- The sections are not renumbered due to the cross-
referencing of those sections found in same or other laws.
- HOW TO READ?
- E.g Section 14(2)(e)(iv)
- Means sub-clause (iv) of clause (e) of sub-section (2) of
section 14.

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CHARGING VS MACHINERY SECTIONS
 Charging Section: The section which
imposes tax is called charging section.
Sections: 4 of the IT Ordinance,2001 is the
charging section, which imposes tax on
taxable income.
 Machinery Sections: Those sections
which provide for the method of
computation and collection of the tax
imposed in charging section.
All the sections of the IT Ord,2001, other than
Section: 4, are machinery sections.
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DEFINITIONS: Section 2

 Three types:
 Exclusive
 Inclusive
 Exhaustive
 1. Exclusive: gives definite meaning to the word or term & therefore excludes
the ordinary dictionary meaning.
 E.g in ordinary sense the expression ‗agri income‘ can be understood as income
arising from all kinds of agri operations. This definition starts with the expression
―mean‖ or ―means‖.
 2. Inclusive: A word that retains its ordinary meaning & also acquires the
meaning assigned to it by the definition given in the statute.
 E.g business includes any trade, commerce, manufacture, profession, vocation
etc
 This type of definition begins with the word ―includes‖.
 3. Exhaustive: it is both inclusive as well as exclusive or it is both flexible as
well as restrictive.

DEFINITIONS…..
Illustration:
 1) ―Charitable purpose‖ includes relief of the
poor, education, medical relief and the
advancement of any other object of general
public utility;]
 2) ―Debt‖ means any amount owing, including
accounts payable and the amounts owing
under promissory notes, bills of exchange,
debentures, securities, bonds or other
financial instruments;

DEF……..
 3)―Employee‖ means any individual engaged
in employment;
 ―Employer‖ means any person who engages
and remunerates an employee;


CHARGING SECTION
Section 4(1) reads:
“4. Tax on taxable income.- (1) Subject to this
Ordinance, income tax shall be imposed for each
tax year, at the rate or rates specified in Division
I or II of Part I of the First Schedule, as the case
may be, on every person who has taxable
income for the year.‖
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FOUR KEY CONCEPTS
There are four major underlying concepts in
Section 4(1):
1. Concept of Tax Year
2. Concept of Tax Rate
3. Concept of Person
4. Concept of Income


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1. TAX YEAR
• Tax year (Section 74)
• Tax year is a period of twelve
months ending on the 30th day of
June.
• Types of Tax Years
– Normal Tax Year
– Special Tax Year
– Transitional Tax Year
NORMAL TAX YEAR
 A Tax Year is denoted by the calendar year in
which 30
th
June of the said tax year falls.
 And, such tax is called ‗Normal Tax Year‘

EXAMPLE
01.07.2008 to 30.06.2009 (Tax Year 2009)
01.7.2005 to 30.06.2006 (Tax Year ………)

SPECIAL TAX YEAR
• On application, the Commissioner may allow a taxpayer
to use a period of twelve months‘ different from normal tax
year.
• Such tax year is called ‗special tax year‘
• It is denoted by the calendar year relevant to normal tax
year in which the closing date of the special tax year falls.
EXAMPLE
- 01.01.2009 to 31.12.2009
31.12.2009 relates to N.T. Year 01.07.2009-30.06.2010
Hence, Tax Year 2010 (not Tax Year 2009)
TRANSITIONAL TAX YEAR
• Where the tax year of a person changes from
normal to special tax year, the period
in-between the two tax years is known as the
―transitional tax year‖.
• A taxpayer with Normal Tax Year 01.06.2007
to 30.06.2008, shifts to Special Tax Year
01.01.2009 – 31.12.2010.
• The period of 01.07.2008 to 31.12.2009 is
known as special tax year.


2. TAX RATES
 Types of Tax Rates:
Progressive
Regressive
Flat
 Tax rates in Inc. Tax Ordinance,2001, are
progressive.
 Tax rates are provided in the 1
st
Shedule
3. PERSON
• Section 80: Person
The following shall be treated as persons for
the purposes of this Ordinance, namely:
(a) An individual;
(b) A company or association of persons
incorporated, formed, organized or
established in Pakistan or elsewhere;
(c) The Federal Government, a foreign
government, a political subdivision of a
foreign government, or public
international organization.
AOP
―Association of Persons‖ includes a
firm, a Hindu undivided family
(HUF), any artificial juridical person
and any body of persons formed
under a foreign law, but does not
include a company.
COMPANY
Company means:
(i) a company as defined in the Companies Ordinance,
1984
(ii) a body corporate formed by or under any law in force
in Pakistan
(iii) a Modaraba
(iv) a body incorporated by or under the law of a country
outside Pakistan relating to incorporation of
companies
(v) a trust, a co-operative society or a finance
society or any other society established or constituted by
or under any law for the time being in force
COMPANY
(vi) a foreign association, whether
incorporated or not, which the Board
has, by general or special order, declared
to be a company for the purposes of this
Ordinance
(vii) a Provincial Government
(viii) a Local Government] in Pakistan, or
(ix) a Small Company as defined in section 2.
4. INCOME
• Section 10: Total Income
The total income of a person for a tax year shall be the sum
of the person‘s income under each of the heads of income
for the year.
• Section 11: Heads of income
For the purposes of the imposition of tax and the computation of
total income, all income shall be classified under the following
heads, namely:
(a) Salary
(b) Income from Property
(c) Income from Business
(d) Capital Gains, and
(e) Income from Other Sources.
INCOME
 Section 9: Taxable income
 The taxable income of a person for a tax
year shall be the total income of the person
for the year reduced (but not below zero) by
the total of any deductible allowances under
Part IX of this Chapter of the person for the
year.
ILLUSTRATION
Head of Inc Salary IFP IFB C.GAINS IFOS
Amount
Chargeable
500,000 250,000 800,000 200,000 150,000
Les: Deductions
Allowed
Nil Nil 600,000 50,000 50,0000
Net Amount
Chargeable
under the Head
500,000 250,000 200,000 150,000 100,000
Total Income 1,200,0000
Less:
Deductable
Allowances
100,000
Taxable Income 1,100,000
Tax Rate 10%
Tax Liability 110,000
Less: Tax Cr 10,000
Tax Payable 100,000
WHAT IS INCOME TAX?
It is an equitable form of taxation wherein
burden lies with whom who pays it.
It is Progressive in nature hence reduces the
economic disparity.


 OBJECTIVES:
 TO RAISE REVENUE FOR THE STATE
 TO STOP PEOPLE CONSUMING SOME
HARMFUL ITEMS IE OPIUM.
 TO REMOVE INEQUALITIES WHILE
DISTRIBUTION OF INCOME.
 TO PROVIDE SERVICES LIKE FREE
SCOOLING & FREE MEDICAL TO THE
POOR.